The Real Obstacle to EU Capital Market Integration: Unreformed Pension Systems
Private pension savings across EU countries remain constrained by the design of pension systems, resulting in significantly less capital available for investment in capital markets.
The Looming Pension System Crisis in the EU
As populations in EU countries age, a pension crisis is on the horizon. Many member states face alarmingly high unfunded public pension liabilities that far surpass their gross public debt levels (see Figure 1). These liabilities are measured based on current life expectancies, effective retirement ages, and pension benefit levels.
In the near future, numerous EU governments will be compelled to alter pension provisions and potentially reverse earlier commitments made to voters.
Impact of Pension Reform on Fiscal Solvency and Capital Markets
Figure 1: Accrued-to-date pension entitlements in social insurance as a percentage of GDP, 2021.
The approach taken by EU governments toward pension reform will largely determine their long-term fiscal solvency. However, pension restructuring should not produce financial market consequences comparable to sovereign debt defaults.
Moreover, pension reforms will critically influence the success or failure of the EU’s goal of capital markets integration, currently pursued under the framework known as the Savings and Investment Union.
Efforts Toward Capital Market Harmonisation
For years, the European Commission, European Council, individual EU countries—especially Germany—and the European Parliament have sought to harmonize rules that improve the functionality and infrastructure of the EU capital markets.
"Pensions reform will also either facilitate or sink the EU’s longstanding attempt at capital markets integration – what is now known as the Savings and Investment Union."
Without addressing fundamental pension system reforms, meaningful progress in integrating EU capital markets is unlikely.
Author's Summary
Unreformed pension systems impose severe constraints on EU capital market integration by limiting private savings and increasing public liabilities, making pension reform essential for fiscal and market stability.